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Author Topic: Opposite of tax-loss harvesting to improve tax efficiency of P2P?

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If one was sitting on a lot of capital gains in stocks, he or she could conceivably sell enough to generate sufficient capital gains to offset P2P capital losses. Repurchase the shares immediately at a stepped-up basis. Wash sale rules don't apply on gains. What do you think? Is this a reasonable way of supporting a larger P2P portfolio?
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Sure you can do this.

A few items to consider:

1. You will need to pay transaction cost twice on the stock sale and repurchase.
2. You can offset capital losses against earned income up to $3,000. So you really should consider doing that if your P2P capital losses exceed $3,000.
3. You can carry over capital losses to the following years when you may have capital gains from other investments or earned income that steps you to higher tax bracket ($3,000 offset limit every year).

from: brycemason on April 03, 2015, 02:46:14 PM
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Right, my sale of LC post IPO covered a good chunk of the amount above the $3k limit. Fred is right, though, that I'd have to make consistent gains in order to offset the structurally consistent losses that this asset generates. What a pita. Seriously debating making a holding company, the business of which is to make loans. Then I could write off all the losses as a business expense and just carry through the net.
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Let's walk this through.  Suppose we have, for 2014, $5,000 in P2P losses.  No other capital gains or losses.  And 100 shares of a stock worth $100/share; tax basis $80 per share.  We plan to sell this stock in 2015, when it may be worth, say $120/share.

Scenario 1:  Don't sell and rebuy the stock.  We have a 2014 write-off of $3,000 in losses against our income, plus a $2,000 capital loss carry over.  In 2015, we sell our stock and have a $4,000 gain, but we can use the $2,000 loss carry over to reduce that to $2,000. 

Scenario 2.  In late 2014, we sell and then re-buy the stock.  We have a 2,000 gain, and we still have $5,000 in P2P losses.  We still deduct the same $3,000 from our income, and our 2014 tax is the same as in scenario 1.  In 2015, we sell the stock and have a $2,000 gain, but no loss carry over, so we have to pay tax on the $2,000 gain.

In other words, there's no difference.
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Having just completed my taxes, I make this observation.

Short-term capital losses offset income in this order: 
  • short-term capital gains (not favorably taxed)
  • long-term capital gains (favorably taxed)
  • earned income to $3K (not favorably taxed)

So you'd want to harvest short-term capital gains.  Otherwise I think you'd be better off holding the long-term gains (vice harvesting them) and carrying forward the loss.

Bottom-line:  if you're not using the LC short-term losses to offset other short-term gains, you're offsetting favorably taxed income
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Here is what I don't quite understand regarding the tax issues and I'll admit I'm new to P2P investing.  Most of the information I've read (including this site and these boards) recommend not investing more than 10% of your portfolio in P2P.  I also see that a normal default level on these loans is between 5-8%.  So assuming you follow some of the generally accepted practices you are going to be investing 80-90% of your money outside of P2P and likely in something like the stock and bond market.  Even if you are very tax efficient in those investments with the S&P dividend yield around 1.8% you will likely recognize at least 1% in dividends and capital gains to use to offset your P2P losses.

Hypothetical $1mm total portfolio
$100k - P2P -> 8% default rate so $8k tax losses
$900k - Stocks, bonds and cash -> 1% yield so $9k tax gains
Net - $1k net cap gains

So realistically unless you are investing the majority of your portfolio in P2P which is certainly risky for such a new vehicle you will likely generate enough capital gains to offset your P2P losses.  It also wouldn't make sense to invest the majority of your portfolio in stocks and bonds in a tax deferred account but your P2P in a taxable account so let's ignore that.  For me I'm already taking advantage of most tax favorable opportunities available and am trying to understand the tax impact of my P2P investments within the context of my overall portfolio.

Am I missing something with my above analysis?  Thanks.
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